Intelsat and OneWeb “a defensive merger”

The post-announcement comments of the SoftBank-engineered merger between Intelsat and OneWeb are coming in, and they are not all favourable.

For example, Sami Kassab, an equity analyst at investment bank Exane/BNP-Paribas, while praising Intelsat’s results said there are still major risks to the deal, not least Intelsat’s existing bondholders agreeing to a severe financial haircut (of between 6 per cent – 54 per cent depending on the debt tranche being held).

“We see a strong deal rationale from Intelsat’s perspective,” says Kassab. “Softbank’s capital injection would help reduce balance sheet stress and provide more flexibility to invest. OneWeb would provide synergies to Intelsat. For one, OneWeb is well advanced on its roadmap of building a global LEO constellation aimed at bridging the digital divide in rural areas. Demand from mobile backhauling to connected cars, the internet of things and other mobility applications is likely to increase substantially in the coming years. OneWeb provides Intelsat with a solid technology roadmap.”

“Secondly, we believe there are commercial synergies in operating a GEO and LEO fleet as suggested by the SES-O3B merger,” adds Kassab. “Thirdly, we believe there can be capex synergies between GEO and LEO fleets by moving some GEO revenues to cheaper LEO satellites.”

“However, while such a deal seems to make sense from the perspectives of Intelsat and Softbank we are struggling to see what strategic benefit Greg Wyler (O3B and OneWeb founder) would gain in such a move. Will it increase OneWeb’s distribution power? We doubt it as we note that O3B has been able to reach over USD100m revenues as a stand-alone company. Note that OneWeb’s business plan is not yet fully funded and is likely to require the company to raise an estimated USD0.8-1.8bn of debt. The appeal of folding OneWeb into a highly-leveraged Intelsat at a time when it needs to raise debt to fully fund its business plan appears questionable,” asks Kassab. “Consequently, we are left thinking that OneWeb’s decision to be folded into Intelsat may actually suggest that it is struggling with its business case.”

Giles Thorne, from investment bank Jefferies, also questions the merits behind the deal. Thorne asks whether OneWeb founder Greg Wyler’s optimistic comments, and saying that there is no upper limit to potential demand, are valid. “If successful (and again, it’s all about execution), then demand will far outstrip supply – and hence Greg Wyler’s statement that there is no upper limit to the capacity OneWeb will launch. This is obviously all un-tested given [High Throughput Satellites+ OneWeb’s LEO constellation] is without direct precedent – and hence why Wyler’s obfuscation around the go-to-market strategy on the call will keep the oversupply wolf at the door.”

More tellingly perhaps – and a critique on some Geostationary players – Thorne reminds investors that SES has its own ownership of O3b, Canada’s Telesat also has a LEO strategy, SkyPerfect JSAT of Japan has a similar LEO strategy. He asks: “We’ve seen operators defend themselves in the face of High Throughput Satellites+LEO, do they now need to defend themselves as to why they’ve not embraced HTS-LEO?”